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Thursday, August 27, 2015

The Value of Venue in Corporate Litigation: Evidence from Exclusive Forum Provisions

Today's guest post comes from Jared Wilson, a Ph.D. candidate working with me at Drexel University. Jared concentrates in the area of corporate governance and had recently completed revision on research that examines corporate litigation.

The
Value of Venue in Corporate Litigation: Evidence from Exclusive Forum
Provisions

Past blog posts have highlighted the growing trend of merger-related
shareholder litigation (Doing a (Large) Deal? Expect to
Get Sued).A recent
study by Matthew Cain
and Steven Davidoff entitled “Takeover Litigation in 2013” reports that while
only 40% of large mergers (>$100 million transaction value) involved
litigation in 2005, over 90% of deals were litigated in 2012.Furthermore, the authors document that of the
deals litigated in 2012, more than 70% incurred multiple lawsuits and over 50%
involved lawsuits filed in multiple states.For example, target shareholders may file lawsuits in both the state of
incorporation and state of headquarters claiming that the board breached its
fiduciary duty by agreeing to sell the firm for too low a price.

Many boards of directors
have responded to this increased threat of shareholder lawsuits filed in
multiple states by adopting exclusive forum provisions to corporate charters or
bylaws.These provisions require that
shareholder lawsuits brought against the firm, executives and/or directors must
be filed in a single state of the board’s choice.On the on hand, opponents of these provisions
argue that the board’s selection of a state such as Delaware as the exclusive
forum insulates managers and directors from the threat and discipline of
litigation.On the other hand, firms
suggest that exclusive forum provisions benefit shareholders by eliminating
duplicative lawsuits, which saves the firm time and money.

On June 25, 2013, the
Delaware Chancery Court upheld the adoption of exclusive forum provisions
confirming that these provisions are here to stay.In a paper recently made available on SSRN, I
find that the impact of exclusive forum provisions on shareholders depends on
whether the firm is likely to receive shareholder litigation in future.Firms that are likely to be takeover targets
appear to benefit from these provisions, since targets are likely to be subject
to multiple lawsuits in multiple states when a takeover is announced.Firms that are not likely to receive
shareholder litigation in the future, however, appear to incur increased costs
to discipline managers and directors through litigation in a state that the
board selects, such as Delaware.

In response to the
increased threat of shareholder litigation filed in multiple states, firms have
adopted exclusive forum provisions which limit lawsuits to a single venue of
the board of director’s choice.It
is unclear whether these provisions impose increased costs on shareholders’
ability to discipline managers and directors or provide benefits to
shareholders by eliminating duplicative lawsuits.I use the Delaware Chancery Court’s announcement
upholding the adoption of these provisions as a natural experiment to evaluate
their wealth implications.Overall, my
findings suggest that exclusive forum provisions create value for shareholders
by specifying a required venue for corporate litigation.

Jared Wilson is a Ph.D. candidate in the finance department at Drexel University. Jared’s main research interests include corporate governance, boards of directors, mergers & acquisitions, and executive turnover.

In particular, Jared’s research focuses on the director and executive labor markets and the governance mechanisms which incentivize managers and the board to act in the best interests of shareholders. Jared completed his undergraduate degrees at the University of Pittsburgh and currently resides in Philadelphia, PA. His homepage can be found here.

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About MergerProf

In addition to their day jobs, Joe and Ralph teach acquisition finance at the Amsterdam Institute of Finance. This blog was created in the summer of 2012 as a tool for those interested in acquisition finance and related material. Admittedly, we define related material broadly to include mergers, private equity, banking, governance, deal making and, well, finance in general. We hope you will enjoy and contribute, critiquing, expanding and providing your own examples related to the posts. We encourage you to join us in this adventure and, for some of you, to see you in Amsterdam, New York or Philadelphia.